What the bank would have to do to offset the output

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Reference no: EM13233212

Focus on the short-run (i.e. ignore labor market equilibrium).Suppose private spending is volatile and unpredictable. (i.e. theIS curve frequently moves around).

(a) Assuming the real money supply is held constant, what does thisimply for real output?

(b) Suppose the Bank of Canada wanted to keep the interest rateconstant. Show (using the money market diagram) what the Bank would have to do to offset the output fluctuations. What would this imply for the IS - LM model?

(c) Given your answers to (a) and (b), which policy (keeping M/Pconstant or keeping r constant) would better offset fluctuations inY , if the main source of instability were fluctuations in privatespending?

Reference no: EM13233212

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